Contract manufacturing remains China's export backbone, but an increasing number of suppliers are now taking more serious steps toward an OBM shift.

China's efforts to boost design capability and international brand building are gaining steam.

Transitioning from a contract manufacturing business model to one that emphasizes ODM and OBM has increasingly become a popular strategy during the past two years. Suppliers have realized how focusing on OEM can depress their bottom line and overall development. Not only are such companies often at a disadvantage in price negotiations, but many of their products are also slapped with anti-dumping and anti-subsidy duties by importing countries.

As with most developments in China's export manufacturing industry, it is the large enterprises that have taken the first step toward reducing OEM's share of their business. But even they cannot stop receiving contract manufacturing orders completely as doing so could prove disastrous.

For one thing, China brands are not likely to gain wide acceptance in traditional markets in a short span of time. Suppliers are instead easing out OEM transactions in emerging economies such as South America, Southeast Asia and Africa. They believe it is easier to promote OBM lines there as consumers in those markets are more conscious about price than established brands.

One of the country's major manufacturers of massagers, Wenzhou Shengli Healthcare Equipment Co. Ltd distributes its iRest line to retail stores in the Philippines, India, Iran, Saudi Arabia and the UAE. The company has since stopped accepting OEM orders from these countries. OBM sales now contribute roughly one-third to total turnover.

While refusing OEM orders could affect relationships with long-term clients and may reduce market share, Guangdong Galanz Enterprise Group Co. Ltd believes product choice is key. As long as the company can offer a range of innovative products at competitive price points, the brand can gain gradual market acceptance.

Branding strategies

One of the most common ways suppliers are taking to promote their brands is to work with reputable distribution agents or franchisers in their target markets. This is the strategy employed by Wenzhou Shengli and TCL Lighting Electrical Appliances Co. Ltd. After penetrating the Middle East and Southeast Asia, TCL is now focusing on cultivating brand recognition in the US, which currently accounts for less than 3 percent of TCL's OBM exports.

"It is not easy to promote our brand in the US," export manager Wan Jun said. "But if our OBM expansion to the US is a success, we plan to continue marketing our brand to other countries." TCL's branded lighting products that are being sold in the US are usually priced 20 percent higher than other China-made items.

Some large suppliers, on the other hand, have opted to purchase an internationally established brand to promote their own. This is not a new strategy, and was employed by Lenovo when it bought IBM's PC arm in December 2004. Now, it is the big garment and footwear companies in Zhejiang and Fujian provinces that are looking to acquire European brands. These labels come from small and midsize businesses, but are said to be well-known, especially among the upscale set.

Refrigerator manufacturer Homa Appliances Co. Ltd is considering both strategies. Branded lines will be developed and promoted in emerging economies such as Africa and South America. But for mature markets such as Europe, the company intends to study established brands it can take over.

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